23 Pnb CA Padilla

8/26/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 196

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536 SUPREME COURT REPORTS ANNOTATED

Philippine National Bank vs. Court of Appeals

G.R. No. 88880. April 30, 1991.*

PHILIPPINE NATIONAL BANK, petitioner, vs. THEHON. COURT OF APPEALS and AMBROSIO PADILLA,respondents.

Commercial Law; CB Circular No. 905; PD 116; Although CBCircular No. 905 Series of 1982 removed the Usury Law ceiling oninterest rates, it did not authorize the PNB or any bank to increasethe agreed interest rates from 18% to 48% within 4 months, inviolation of PD 116 which limits such charges to “once every twelvemonths”.—In the present case, the PNB relied on its own BoardResolution No. 681 (Exh. 10), PNB Circular No. 407984 (Exh.13), and PNB Circular No. 4012984 (Exh. 15), but thoseresolution and circulars are neither

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* FIRST DIVISION.

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VOL. 196, APRIL 30, 1991 537


laws nor resolutions of the Monetary Board. CB Circular No. 905,Series of 1982 (Exh. 11) removed the Usury Law ceiling oninterest rates—“x x x increases in interest rates are not subject toany ceiling prescribed by the Usury Law.” but it did not authorizethe PNB, or any bank for that matter, to unilaterally andsuccessively increase the agreed interest rates from 18% to 48%



within a span of four (4) months, in violation of P.D. 116 whichlimits such changes to “once every twelve months.”

Same; Civil Law; Mutuality of Contracts; A contractcontaining a condition which makes its fulfillment dependentexclusively upon the uncontrolled will of one of the contractingparties is void.—Besides violating P.D. 116, the unilateral actionof the PNB in increasing the interest rate on the privaterespondent’s loan, violated the mutuality of contracts ordained inArticle 1308 of the Civil Code: “ART. 1308. The contract mustbind both contracting parties; its validity or compliance cannot beleft to the will of one of them.” In order that obligations arisingfrom contracts may have the force of law between the parties,there must be mutuality between the parties based on theiressential equality. A contract containing a condition which makesits fulfillment dependent exclusively upon the uncontrolled will ofone of the contracting parties, is void (Garcia vs. Rita Legarda,Inc., 21 SCRA 555). Hence, even assuming that the P1.8 millionloan agreement between the PNB and the private respondentgave the PNB a license (although in fact there was none) toincrease the interest rate at will during the term of the loan, thatlicense would have been null and void for being violative of theprinciple of mutuality essential in contracts. It would haveinvested the loan agreement with the character of a contract ofadhesion, where the parties do not bargain on equal footing, theweaker party’s (the debtor) participation being reduced to thealternative “to take it or leave it” (Qua vs. Law Union & RockInsurance Co., 95 Phil. 85). Such a contract is a veritable trap forthe weaker party whom the courts of justice must protect againstabuse and imposition.

Same; Same; Increase of interest rate; The increases imposedby PNB contravene Art. 1956 of the Civil Code.—PNB’s successiveincreases of the interest rate on the private respondent’s loan,over the latter’s protest, were arbitrary as they violated anexpress provision of the Credit Agreement (Exh. 1) Section 9.01that its terms “may be amended only by an instrument in writingsigned by the party to be bound as burdened by suchamendment.” The increases imposed by PNB also contravene Art.1956 of the Civil Code which provides that

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“no interest shall be due unless it has been expressly stipulated inwriting.”

PETITION for certiorari to review the decision of the Courtof Appeals.

The facts are stated in the opinion of the Court. The Chief Legal Counsel for petitioner. Ambrosio Padilla, Mempin & Reyes Law Offices for

private respondent.

GRIÑOAQUINO, J.:

The Philippine National Bank (PNB) has appealed bycertiorari from the decision promulgated on June 27, 1989by the Court of Appeals in CAG.R. CV No. 09791 entitled,“AMBROSIO PADILLA, plaintiffappellant versusPHILIPPINE NATIONAL BANK, defendantappellee,”reversing the decision of the trial court which haddismissed the private respondent’s complaint “to annulinterest increases.” (p. 32, Rollo.) The Court of Appealsrendered judgment:

“x x x declaring the questioned increases of interest asunreasonable, excessive and arbitrary and ordering thedefendantappellee [PNB] to refund to the plaintiffappellant theamount of interest collected from July, 1984 in excess of twentyfour percent (24%) per annum. Costs against the defendantappellee.” (pp. 1415, Rollo.)

In July 1982, the private respondent applied for, and wasgranted by petitioner PNB, a credit line of P1.8 million,secured by a real estate mortgage, for a term of two (2)years, with 18% interest per annum. Private respondentexecuted in favor of the PNB a Credit Agreement, two (2)promissory notes in the amount of P900,000.00 each, and aReal Estate Mortgage Contract.

The Credit Agreement provided that

“9.06 Other Conditions. The Borrowers hereby agree to be boundby the rules and regulations of the Central Bank and the currentand general policies of the Bank and those which the Bank mayadopt in the future, which may have relation to or in any wayaffect the Line,

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which rules, regulations and policies are incorporated herein byreference as if set forth herein in full. Promptly upon receipt of awritten request from the Bank, the Borrowers shall execute anddeliver such documents and instruments, in form and substancesatisfactory to the Bank, in order to effectuate or otherwisecomply with such rules, regulations and policies.” (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized thePNB to increase the stipulated 18% interest per annum“within the limits allowed by law at any time depending onwhatever policy it [PNB] may adopt in the future;Provided, that, the interest rate on this note shall becorrespondingly decreased in the event that the applicablemaximum interest rate is reduced by law or by theMonetary Board.” (pp. 8586, Rollo; italics ours.)

The Real Estate Mortgage Contract likewise providedthat:

“(k) INCREASE OF INTEREST RATE“The rate of interest charged on the obligation secured by this

mortgage as well as the interest on the amount which may havebeen advanced by the MORTGAGEE, in accordance with theprovisions hereof, shall be subject during the life of this contract tosuch an increase within the rate allowed by law, as the Board ofDirectors of the MORTGAGEE may prescribe for its debtors.” (p.86, Rollo; emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net proceeds ofwhich were released to the private respondent by creditingor transferring the amount to his current account with thebank.

On June 20, 1984, PNB informed the private respondentthat (1) his credit line of P1.8 million “will expire on July 4,1984,” (2) “[i]f renewal of the line for another year isintended, please submit soonest possible your request,” and(3) the “present policy of the Bank requires at least 30%reduction of principal before your line can be renewed.” (pp.8687, Rollo.) Complying, private respondent on June 25,1984, paid PNB P540,000.00 (30% of P1.8 million) andrequested that “the balance of P1,260,000.00 be renewedfor another period of two (2) years under the samearrangement” and that “the increase of the interest rate of



my mortgage loan be from 18% to 21%” (p. 87,

540



Rollo.)On July 4, 1984, private respondent paid PNB

P360,000.00.On July 18, 1984, private respondent reiterated in

writing his request that “the increase in the rate of interestfrom 18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made anadditional payment of P100,000.

On August 10, 1984, PNB informed private respondentthat “we can not give due course to your request forpreferential interest rate in view of the following reasons:Existing Loan Policies of the bank requires 32% for loan ofmore than one year; Our present cost of funds hassubstantially increased.” (pp. 8788, Rollo.)

On August 17, 1984, private respondent further paidPNB P150,000.00.

In a letter dated August 24, 1984 to PNB, privaterespondent announced that he would “continue makingfurther payments, and instead of a ‘loan of more than oneyear,’ I shall pay the said loan before the lapse of one yearor before July 4, 1985. x x x I reiterate my request that theincrease of my rate of interest from 18% ‘be fixed at 21% or24%.’ ” (p. 88, Rollo.) On September 12, 1984, privaterespondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13,1984, PNB informed private respondent that “the interestrate on your outstanding line/loan is hereby adjusted from32% p.a. to 41% p.a. (35% prime rate + 6%) effectiveSeptember 6, 1984;” and further explained “why we can notgrant your request for a lower rate of 21% or 24%.” (pp. 8889, Rollo.)

In a letter dated September 24, 1984 to PNB, privaterespondent registered his protest against the increase ofinterest rate from 18% to 32% on July 4, 1984 and from32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated hisrequest that the interest rate should not be increased from18% to 32% and from 32% to 41%. He also attached (as



“a.

“b.

“c.

“d.

payment) a check for P140,000.00.Like rubbing salt on the private respondent’s wound, the

petitioner informed private respondent on October 29,1984, that “the interest rate on your outstanding line/loanis hereby

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VOL. 196, APRIL 30, 1991 541


adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6%spread) effective 25 October 1984.” (p. 89, Rollo.)

In November 1984, private respondent paid PNBP50,000.00 thus reducing his principal loan obligation toP300,000.00.

On December 18, 1984, private respondent filed in theRegional Trial Court of Manila a complaint against PNBentitled, “AMBROSIO PADILLA vs. PHILIPPINENATIONAL BANK” (Civil Case No. 8428391), prayingthat judgment be rendered:

Declaring that the unilateral increase of interestrates from 18% to 32%, then to 41% and again to48% are illegal, not valid nor binding on plaintiff,and that an adjustment of his interest rate from18% to 24% is reasonable, fair and just;The interest rate on the P900,000.00 released onSeptember 27, 1982 be counted from said date andnot from July 4, 1984;The excess of interest payment collected bydefendant bank by debiting plaintiff’s currentaccount be refunded to plaintiff or credited to hiscurrent account;Pending the determination of the merits of thiscase, a restraining order and/or a writ ofpreliminary injunction be issued (1) to restrainand/or enjoin defendant bank for [sic] collectingfrom plaintiff and/or debiting his current accountwith illegal and excessive increases of interestrates; and (2) to prevent defendant bank fromdeclaring plaintiff in default for nonpayment andfrom instituting any foreclosure proceeding,extrajudicial or judicial, of the valuable commercial



property of plaintiff.” (pp. 8990, Rollo.)

In its answer to the complaint, PNB denied that theincreases in interest rates were illegal, unilateral excessiveand arbitrary and recited the reasons justifying saidincreases.

On March 31, 1985, the private respondent paid theP300,000balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986,dismissing the complaint because the increases of interestwere properly made.

The private respondent appealed to the Court ofAppeals. On June 27, 1989, the Court of Appeals reversedthe trial court, hence, PNB’s recourse to this Court by apetition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNB’s petition forreview can be resolved into a single legal issue of whetherthe bank,

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within the term of the loan which it granted to the privaterespondent, may unilaterally change or increase theinterest rate stipulated therein at will and as often as itpleased.

The answer to that question is no.In the first place, although Section 2, P.D. No. 116 of

January 29, 1973, authorizes the Monetary Board toprescribe the maximum rate or rates of interest for loans orrenewal thereof and to change such rate or rates wheneverwarranted by prevailing economic and social conditions, itexpressly provides that “such changes shall not be madeoftener than once every twelve months.”

In this case, PNB, over the objection of the privaterespondent, and without authority from the MonetaryBoard, within a period of only four (4) months, increasedthe 18% interest rate on the private respondent’s loanobligation three (3) times: (a) to 32% in July 1984; (b) to41% in October 1984; and (c) to 48% in November 1984.Those increases were null and void, for if the MonetaryBoard itself was not authorized to make such changesoftener than once a year, even less so may a bank which is



subordinate to the Board.Secondly, as pointed out by the Court of Appeals, while

the private respondentdebtor did agree in the Deed of RealEstate Mortgage (Exh. 5) that the interest rate may beincreased during the life of the contract “to such increasewithin the rate allowed by law, as the Board of Directors ofthe MORTGAGEE may prescribe” (Exh. 5e1) or “withinthe limits allowed by law” (Promissory Notes, Exhs. 2, 3,and 4), no law was ever passed in July to November 1984increasing the interest rates on loans or renewals thereof to32%, 41% and 48% (per annum), and no documents wereexecuted and delivered by the debtor to effectuate theincreases. The Court of Appeals observed.

“x x x We focus Our attention first of all on the agreementbetween the parties as embodied in the following instruments, towit: (1) Exhibit ‘1’—Credit Agreement dated July 1, 1982; (2)Exhibit ‘2’—Promissory Note dated July 5, 1982; (3) Exhibit ‘3’—Promissory Note dated January 3, 1983; (4) Exhibit ‘4’—Promissory Note, dated December 13, 1983; and (5) Exhibit ‘5’—Real Estate Mortgage contract dated July 1, 1982.

“Exhibit ‘1’ states in its portion marked Exhibit ‘1g1’:

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VOL. 196, APRIL 30, 1991 543


‘9.06 Other Conditions. The Borrowers hereby agree to be bound by the

rules and regulations of the Central Bank and the current and general

policies of the Bank and those which the Bank may adopt in the future,

which may have relation to or in any way affect the Line, which rules,

regulations and policies are incorporated herein by reference as if set

forth herein in full. Promptly upon receipt of a written request from the

Bank, the Borrowers shall execute and deliver such documents and

instruments, in form and substance satisfactory to the Bank, in order to

effectuate or otherwise comply with such rules, regulations and policies.’

“Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively markedExhibits ‘2B,’ ‘3B,’ and ‘4B’ uniformly authorize the defendantbank to increase the stipualted interest rte of 18% per annum‘within the limits allowed by law at any time depending onwhatever policy it may adopt in the future: Provided, that, theinterest rate on this note shall be correspondingly decreased inthe event that the applicable maximum interest rate is reduced bylaw or by the Monetary Board.’



“Exhibit ‘5’ in its portion marked Exhibit ‘5e1’ stipulates:

‘(k) INCREASE OF INTEREST RATE

‘The rate of interest charged on the obligation secured by this

mortgage as well as the interest on the amount which may have been

advanced by the MORTGAGEE, in accordance with the provisions hereof,

shall be subject during the life of this contract to such an increase within

the rate allowed by law, as the Board of Directors of the MORTGAGEE

may prescribe for its debtors.’

“Clearly, then, the agreement between the parties authorizedthe defendant bank to increase the interest rate beyond theoriginal rate of 18% per annum but ‘within the limits allowed bylaw’ or ‘within the rate allowed by law,’ it being declared theobligation of the plaintiff as borrower to execute and deliver thecorresponding documents and instruments to effectuate theincrease.” (pp. 1112, Rollo.)

In Banco Filipino Savings and Mortgage Bank vs. Navarro,15 SCRA 346 (1987), this Court disauthorized the bankfrom raising the interest rate on the borrowers’ loan from12% to 17% despite an escalation clause in the loanagreement signed by the debtors authorizing BancoFilipino “to correspondingly increase the interest ratestipulated in this contract without advance notice to me/usin the event a law should be enacted

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increasing the lawful rates of interest that may be chargedon this particular kind of loan.” (italics supplied.)

In the Banco Filipino case, the bank relied on Section 3of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p.676J) which provided that “the maximum rate of interest,including commissions premiums, fees and other chargeson loans with a maturity of more than 730 days by bankinginstitution x x x shall be 19%.”

This Court disallowed the increase for the simple reasonthat said “Circular No. 494, although it has the effect oflaw is not a law.” Speaking through Mme. JusticeAmeurfina M. Herrera, this Court held:

“It is now clear that from March 17, 1980, escalation clauses to be



valid should specifically provide: (1) that there can be an increasein interest if increased by law or by the Monetary Board; and (2)in order for such stipulation to be valid, it must include aprovision for reduction of the stipulated interest ‘in the event thatthe applicable maximum rate of interest is reduced by law or bythe Monetary Board.’ ” (p. 111, Rollo.)

In the present case, the PNB relied on its own BoardResolution No. 681 (Exh. 10), PNB Circular No. 407984(Exh. 13), and PNB Circular No. 4012984 (Exh. 15), butthose resolution and circulars are neither laws norresolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removedthe Usury Law ceiling on interest rates—

“x x x increases in interest rates are not subject to any ceilingprescribed by the Usury Law.”

but it did not authorize the PNB, or any bank for thatmatter, to unilaterally and successively increase the agreedinterest rates from 18% to 48% within a span of four (4)months, in violation of P.D. 116 which limits such changesto “once every twelve months.”

Besides violating P.D. 116, the unilateral action of thePNB in increasing the interest rate on the privaterespondent’s loan, violated the mutuality of contractsordained in Article 1308 of the Civil Code:

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VOL. 196, APRIL 30, 1991 545


“ART. 1308. The contract must bind both contracting parties; itsvalidity or compliance cannot be left to the will of one of them.”

In order that obligations arising from contracts may havethe force of law between the parties, there must bemutuality between the parties based on their essentialequality. A contract containing a condition which makes itsfulfillment dependent exclusively upon the uncontrolledwill of one of the contracting parties, is void (Garcia vs.Rita Legarda, Inc., 21 SCRA 555). Hence, even assumingthat the P1.8 million loan agreement between the PNB andthe private respondent gave the PNB a license (although infact there was none) to increase the interest rate at will



during the term of the loan, that license would have beennull and void for being violative of the principle ofmutuality essential in contracts. It would have invested theloan agreement with the character of a contract ofadhesion, where the parties do not bargain on equalfooting, the weaker party’s (the debtor) participation beingreduced to the alternative “to take it or leave it” (Qua vs.Law Union & Rock Insurance Co., 95 Phil. 85). Such acontract is a veritable trap for the weaker party whom thecourts of justice must protect against abuse and imposition.

PNB’s successive increases of the interest rate on theprivate respondent’s loan, over the latter’s protest, werearbitrary as they violated an express provision of theCredit Agreement (Exh. 1) Section 9.01 that its terms “maybe amended only by an instrument in writing signed by theparty to be bound as burdened by such amendment.” Theincreases imposed by PNB also contravene Art. 1956 of theCivil Code which provides that “no interest shall be dueunless it has been expressly stipulated in writing.”

The debtor herein never agreed in writing to pay theinterest increases fixed by the PNB beyond 24% perannum, hence, he is not bound to pay a higher rate thanthat.

That an increase in the interest rate from 18% to 48%within a period of four (4) months is excessive, as found bythe Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in thedecision of the Court of Appeals in CAG.R. CV No. 09791,the Court resolved to deny the petition for review for lackof merit, with

546


People vs. Motar

costs against the petitioner.SO ORDERED.

Narvasa (Chairman), Cruz, Gancayco andMedialdea, JJ., concur.

Petition denied.

Note.—Both Article 2212 of the Civil Code and Sec. 5 of



the Usury Law refer to stipulated or conventional interestand does not apply where no interest was stipulated by theparties (Philippine American Accident Insurance Company,Inc. vs. Flores, 97 SCRA 811.)

——o0o——

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